<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
--------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 333-53953
CONVERGENT COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Colorado 84-1337265
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
400 Inverness Drive South, Suite 400
Englewood, Colorado 80112
(303) 749-3000
(Address and telephone number of principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
(1) Yes _X_ No ___
(2) Yes _X_ No ___
On August 5, 1999, 27,681,241 shares of the registrant's
Common Stock were outstanding
(reflects the one-for-two reverse stock split on July 20, 1999).
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets--December 31, 1998 and June 30, 1999........................................... 1
Consolidated Statements of Operations and Comprehensive Loss--Three and Six months ended June 30,
1998 and 1999............................................................................................. 2
Consolidated Statement of Shareholders' Deficit--Six months ended June 30, 1999............................ 3
Consolidated Statements of Cash Flows--Six months ended June 30, 1998 and 1999............................. 4
Notes to Consolidated Financial Statements................................................................. 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 10
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.................................................................................. 21
Item 2. Changes in Securities.............................................................................. 21
Item 3. Defaults Upon Senior Securities.................................................................... 21
Item 4. Submission of Matters to a Vote of Securities Holders.............................................. 21
Item 5. Other Information.................................................................................. 21
Item 6. Exhibits and Reports on Form 8-K
Exhibits......................................................................................... 21
Reports on Form 8-K.............................................................................. 21
</TABLE>
When used in this Report, the words "intend," "expects," "plans,"
"estimates," "anticipates," "projects," "believes," and similar expressions are
intended to identify forward-looking statements. Specifically, statements
included in this Report that are not historical facts, including statements
about our beliefs and expectations about our business and our industry are
forward-looking statements. These statements are subject to risks and
uncertainties that could cause actual results or outcomes to differ materially.
These risks and uncertainties include, but are not limited to, the degree to
which we are leveraged and the restrictions imposed on us under our existing
debt instruments that may adversely affect our ability to finance our future
operations, to compete effectively against better capitalized competitors, to
withstand downturns in our business or the economy generally and other factors
discussed in our filings with the Securities and Exchange Commission. Forward--
looking statements included in this Report speak only as of the date of this
report and we will not revise or update these statements to reflect events or
circumstances after the date of this report or to reflect the occurrence of
unanticipated events.
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
--------------- --------------
(unaudited)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents.................................................................... $ 25,597,461 $ 11,242,052
Short-term investments....................................................................... -- 7,957,400
Restricted cash.............................................................................. 20,800,000 20,800,000
Trade accounts receivable, net of allowance for doubtful accounts of
$1,908,811 and $1,581,197, respectively.................................................... 17,661,220 22,796,717
Inventory.................................................................................... 6,826,732 11,337,352
Prepaid expenses, deposits and other current assets.......................................... 2,134,210 4,471,935
--------------- --------------
Total current assets...................................................................... 73,019,623 78,605,456
Property, network and equipment................................................................ 28,139,460 44,784,898
Less accumulated depreciation................................................................ (4,882,832) (8,906,829)
--------------- --------------
Total property, network and equipment..................................................... 23,256,628 35,878,069
Restricted cash, non-current................................................................... 30,549,658 22,467,381
Goodwill, net of amortization of $2,967,283 and $5,530,474, respectively....................... 46,526,288 50,100,536
Other intangible assets, net of amortization of $1,470,363 and $2,336,189,
respectively.................................................................................. 10,281,016 10,537,971
Leases receivable, less current portion........................................................ 796,790 2,359,232
Investments and other assets................................................................... 1,225,626 646,792
--------------- --------------
Total assets.............................................................................. $ 185,655,629 $ 200,595,437
=============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Trade accounts payable....................................................................... $ 15,061,514 $ 24,466,860
Accrued compensation......................................................................... 4,583,140 5,184,433
Accrued interest............................................................................. 5,214,133 5,284,578
Other accrued liabilities.................................................................... 8,666,182 7,940,721
Deferred revenue and customer deposits....................................................... 5,211,748 5,252,206
Liability related to business combination.................................................... -- 1,350,000
Current portion of long-term debt............................................................ 603,919 4,107,090
Current portion of capital lease obligations................................................. 5,179,251 7,790,672
--------------- --------------
Total current liabilities................................................................. 44,519,887 61,376,560
Long term debt, less discount and current portion.............................................. 153,730,573 165,409,037
Long term capital lease obligations, less current portion...................................... 8,754,054 11,790,481
--------------- --------------
Total liabilities......................................................................... 207,004,514 238,576,078
Commitments
Convertible preferred stock.................................................................... -- 19,206,378
Shareholders' deficit:
Common stock, no par value, 100 million shares authorized, 13,924,135
and 14,838,347 issued and outstanding, respectively........................................ 27,486,554 36,438,015
Warrants..................................................................................... 11,719,399 10,895,321
Treasury stock............................................................................... (501,674) (1,098,812)
Deferred compensation obligation............................................................. 501,674 1,098,812
Accumulated other comprehensive income....................................................... -- 22,423
Unearned compensation........................................................................ (150,150) (122,850)
Accumulated deficit.......................................................................... (60,404,688) (104,419,928)
--------------- --------------
Total shareholders' deficit............................................................... (21,348,885) (57,187,019)
--------------- --------------
Total liabilities and shareholders' deficit............................................... $ 185,655,629 $ 200,595,437
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
1
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------- --------------------------------
1998 1999 1998 1999
--------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
(unaudited)
Data and voice service revenue......................... $ 2,422,546 $ 16,731,557 $ 4,229,619 $ 32,042,133
Data and voice product revenue......................... 5,559,292 19,892,783 10,275,084 35,063,073
--------------- -------------- ------------- ---------------
Total revenue........................................ 7,981,838 36,624,340 14,504,703 67,105,206
Cost of sales excluding depreciation................... 5,771,651 22,652,397 10,569,675 42,725,966
Selling, general and administrative.................... 7,710,565 27,410,867 13,772,410 50,748,448
Depreciation and amortization.......................... 1,190,712 4,107,529 1,953,151 6,970,421
--------------- -------------- ------------- ---------------
Total operating expenses............................. 14,672,928 54,170,793 26,295,236 100,444,835
Operating loss....................................... (6,691,090) (17,546,453) (11,790,533) (33,339,629)
Interest expense..................................... (5,830,022) (6,149,357) (5,882,591) (12,086,022)
Interest income...................................... 1,348,919 770,480 1,380,397 1,721,126
Other income (expense), net.......................... 3,473 (402,661) 13,340 (310,715)
--------------- -------------- ------------- ---------------
Net loss............................................... (11,168,720) (23,327,991) (16,279,387) (44,015,240)
Other comprehensive income, unrealized holding
gains on securities................................. 234,618 10,723 292,308 22,423
Comprehensive loss................................... $ (10,934,102) $ (23,317,268) $ (15,987,079) $ (43,992,817)
=============== ============== ============= ===============
Net loss per share:
Net loss per share (basic and diluted)............... $ (0.82) $ (1.64) $ (1.20) $ (3.12)
Weighted average number of shares outstanding
(basic and diluted)................................. 13,660,317 14,253,268 13,565,687 14,098,801
=============== ============== ============= ===============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
2
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT
(unaudited)
<TABLE>
<CAPTION>
Deferred
Common Common Treasury Compensation
Shares Stock Warrants Stock Obligation
------------ -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1998......... 13,924,135 $ 27,486,554 $ 11,719,399 $ (501,674) $ 501,674
Common stock issued for:
401(k) match...................... 75,503 712,596 -- -- --
Business combinations............. 61,925 619,250 -- -- --
Exercise of stock options......... 36,500 179,000 -- -- --
Exercise of warrants.............. 683,487 6,498,395 (1,276,558) -- --
Compensation....................... 94,297 946,720 -- -- --
Shares repurchased................. (37,500) (4,500) -- -- --
Distribution of deferred stock..... -- -- -- 52,199 (52,199)
Deferred stock compensation........ -- -- -- (649,337) 649,337
Warrants issued in connection with
financing......................... -- -- 452,480 -- --
Other comprehensive income:
Unrealized gain on securities..... -- -- -- -- --
Net loss........................... -- -- -- -- --
------------ -------------- ------------- ------------- ---------------
Balance, June 30, 1999............. 14,838,347 $ 36,438,015 $ 10,895,321 $ (1,098,812) $ 1,098,812
============ ============== ============= ============= ===============
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other
Unearned Comprehensive Accumulated
Compensation Income Deficit Total
------------ ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1998......... (150,150) $ -- $ (60,404,688) $ (21,348,885)
Common stock issued for:
401(k) match...................... -- -- -- 712,596
Business combinations............. -- -- -- 619,250
Exercise of stock options......... -- -- -- 179,000
Exercise of warrants.............. -- -- -- 5,221,837
Compensation....................... 27,300 -- -- 974,020
Shares repurchased................. -- -- -- (4,500)
Distribution of deferred stock..... -- -- -- --
Deferred stock compensation........ -- -- -- --
Warrants issued in connection with
financing......................... -- -- -- --
Other comprehensive income:
Unrealized gain on securities..... -- 22,423 -- 22,423
Net loss........................... -- -- (44,015,240) (44,015,240)
------------ ------------- ------------- -------------
Balance, June 30, 1999............. (122,850) $ 22,423 $(104,419,928) $ (57,187,019)
============ ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
3
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months ended
------------------------------------------
June 30, 1998 June 30, 1999
------------------- --------------------
<S> <C> <C>
(unaudited)
Cash flows from operating activities
Net loss................................................................ $ (16,279,387) $ (44,015,240)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization.......................................... 1,953,151 6,970,421
Amortization of deferred financing costs and accretion of debt discount 191,804 843,459
Provision for uncollectible accounts................................... 144,180 754,464
Stock compensation expense............................................. 576,528 974,020
401(k) contributions through the issuance of common stock.............. 297,079 712,596
Loss on sale of investment............................................. -- 220,500
Change in working capital (net of acquisitions):
Trade accounts receivable.............................................. (3,197,592) (3,740,375)
Inventory.............................................................. (547,597) (1,203,027)
Prepaid expenses and other current assets.............................. (1,471,531) (1,634,802)
Trade accounts payable................................................. 2,353,884 3,397,280
Accrued compensation................................................... 536,941 242,059
Accrued interest....................................................... 5,200,000 70,445
Other accrued liabilities.............................................. 1,406,099 (822,576)
Deferred revenue and customer deposits................................. -- (816,102)
------------------- --------------------
Net cash used in operating activities.................................... (8,836,441) (38,046,878)
Cash flows from investing activities
Additions of property, network and equipment............................ (5,645,999) (1,300,914)
Acquisitions, net of cash acquired...................................... (1,608,743) (2,051,833)
Short-term investments.................................................. (73,746,649) (7,934,977)
Restricted cash......................................................... (59,478,484) 8,082,277
Leases receivable....................................................... -- (2,143,795)
Proceeds from sale of investment........................................ -- 154,500
Other assets............................................................ (179,819) (131,303)
------------------- --------------------
Net cash used in investing activities.................................... (140,659,694) (5,326,045)
Cash flows from financing activities
Proceeds from private placements, net of offering costs................. 154,153,217 19,206,378
Proceeds from new borrowings, net of financing costs.................... 120,738 9,529,990
Payments on notes payable............................................... (704,868) (2,243,541)
Payments on capital leases.............................................. (559,882) (2,871,650)
Proceeds from exercise of warrants and stock options.................... 123,100 5,400,837
Repurchase of common shares............................................. -- (4,500)
------------------- --------------------
Net cash provided by financing activities................................ 153,132,305 29,017,514
------------------- --------------------
Net increase (decrease) in cash and cash equivalents..................... 3,636,170 (14,355,409)
Cash and cash equivalents at beginning of period......................... 667,344 25,597,461)
Cash and cash equivalents at end of period............................... $ 4,303,514 $ 11,242,052
=================== ====================
Supplemental disclosure of other cash and non-cash investing and
financing activities:
Acquisition of property, network and equipment through the issuance of
capital leases and other financing facilities.......................... $ 3,372,326 $ 10,518,704
Acquisition of property, network and equipment in accounts payable
waiting to be financed................................................. -- 3,901,556
Cash paid for interest.................................................. 490,787 11,172,108
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION:
References in these footnotes to "Convergent Communications," "us," "we,"
"our" refer to Convergent Communications, Inc. and its subsidiaries.
Convergent Communications is a single-source provider of data and voice
communications systems, services and solutions to small and medium sized
businesses. We design, build, install, manage and monitor data and voice
networks inside enterprises and provide external network services such as data
transport, long distance, local service and Internet access. We offer these
products and services on a stand-alone basis or as part of a bundled offering
that can include owning an enterprise's internal data and voice networks. We are
also installing an integrated data and voice switching platform in each of the
markets in which we operate to efficiently handle our customers' traffic. We
provide the following products and services:
. Data Services
. Voice Services
. Enterprise Network Services
. Data Products
. Voice Products
Our ultimate success depends upon, among other factors, establishing our
nationwide network, funding the development of our enterprise networks,
continuing to develop our customer care and sales organizations, integrating
acquired businesses, attracting and retaining customers, continuing to develop
and integrate our operational support system and other back office systems,
responding to competitive developments, continuing to attract, retain and
motivate qualified personnel, and continuing to upgrade our technologies and
commercialize our services incorporating these technologies. There is no
assurance that we will be successful in addressing these matters and our failure
to do so could have a material adverse effect on our business prospects,
operating results and financial condition.
Our business plan will continue to require a substantial amount of capital
to fund our expansion of our existing and acquired markets. As we continue to
expand our business, we will seek additional sources of financing to fund our
development. We estimate that our existing funds at June 30, 1999, the proceeds
from our July initial public offering, our available borrowing and lease
financing capacity and the proceeds from the exercise of warrants in July will
be sufficient to meet our capital requirements for the foreseeable future. We
could, however, require additional capital sooner due to material shortfalls in
our operating and financial performance or if we are more aggressive in our
expansion than currently contemplated. We cannot be certain that we would be
successful in raising sufficient debt or equity capital to fund our operations
on a timely basis or on acceptable terms. If needed financing were not available
on acceptable terms, we could be compelled to alter our business strategy, or
delay or abandon some of our future plans or expenditures or fail to make
interest payments on our debt. Any of these events would have a material adverse
effect on our financial condition, results of operations and liquidity.
2. INTERIM FINANCIAL DATA:
The consolidated balance sheet as of June 30, 1999, statement of
shareholders' deficit for the six months ended June 30, 1999 and the
consolidated statements of operations and comprehensive loss, and cash flows for
the three and six months ended June 30, 1998 and 1999 have been prepared by us
without audit. In our opinion, all adjustments, consisting of only normal
recurring adjustments, necessary to present fairly the consolidated financial
position, results of operations and cash flows have been made. The results of
operations for these interim periods are not necessarily indicative of the
results for the full year.
The accompanying financial statements should be read with our consolidated
financial statements included in our 1998 Form 10-K filed with the Securities
and Exchange Commission on March 16, 1999.
Certain prior period amounts have been reclassified to conform to the
current period's presentation.
5
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. ACQUISITIONS:
Kansas Communications, Inc. In February 1999, we acquired the assets and
assumed certain liabilities of Kansas Communications, Inc. ("KCI"). KCI was a
telecommunications equipment provider and integrator. The purchase price
consisted of $1.5 million in cash, $4.5 million in notes payable and 24,925
shares of our common stock, which, for purchase accounting purposes, were
assigned a value of $10.00, and assumed liabilities of $2.4 million resulting in
total consideration of $8.7 million. In April 1999, $1.5 million of the notes
payable were paid with the proceeds from the sale of our Series A Convertible
Preferred Stock. An additional $2.0 million was paid subsequent to June 30,
1999.
BSSi Innovations, Inc. In April 1999, we acquired BSSi Innovations, Inc.
("BSSi"). BSSi was a data network integration services provider based in
Chicago, Illinois. The purchase price consisted of $455,000 in cash, 37,000
shares of our common stock, which for purchase accounting purposes were assigned
a value of $10.00 per share, and assumed debt of approximately $525,000,
resulting in total consideration of $1.4 million. An additional 10,000 shares
may be issued if certain financial conditions are met.
Choice Solutions, Inc. In June 1999 we entered into an agreement to purchase
the majority of the assets and assume certain liabilities of Choice Solutions,
Inc. ("CSI"). In addition, in June, we entered into a Management Agreement with
CSI which gives us effective control of the operations of CSI. Our financial
statements include the accounts and results of operations from the effective
date of the management agreement. Subsequent to June 30, 1999 we completed the
acquisition of the majority of the assets and certain liabilities of CSI. CSI
was a data network integration services provider based in Dallas, Texas. The
purchase price consisted of $1,125,000 in cash and 15,000 shares of our common
stock valued at $225,000, resulting in total consideration of $1,350,000.
Additional shares of our common stock may be issued if certain financial results
are attained. As of June 30, 1999 we had recorded a liability for the
acquisition of $1,350,000.
We accounted for each of these acquisitions as a business combination using
the purchase method of accounting. In connection with the acquisitions, the
excess of consideration given over the fair market value of the net assets
acquired is being amortized on a straight line basis over the estimated life of
the intangible asset acquired which is ten years. The accompanying financial
statements include the accounts of the acquired companies from the effective
dates of the acquisitions.
The allocation of consideration given during the six months ended June 30,
1999 to the acquired assets is as follows:
<TABLE>
<CAPTION>
Purchase price:
<S> <C>
Cash paid................................................................................. $ 2,056,535
Notes payable issued to former owner...................................................... 4,490,000
Liability related to a business combination............................................... 1,350,000
Common stock issued to the former owners.................................................. 619,250
Total purchase price................................................................... $ 8,515,785
================
Allocation of the purchase price to acquired assets and assumed liabilities:
Cash...................................................................................... $ 4,702
Accounts receivable....................................................................... 2,332,929
Inventory................................................................................. 3,307,593
Prepaid expenses, deposits and other current assets....................................... 121,570
Equipment................................................................................. 805,964
Goodwill.................................................................................. 5,954,096
Liabilities and debt assumed.............................................................. (4,011,069)
----------------
Amounts allocated...................................................................... $ 8,515,785
================
</TABLE>
6
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. CREDIT FACILITY:
In June 1999, we entered into a $10.0 million senior secured credit
facility with Goldman Sachs Credit Partners L.P. The proceeds of this facility
will be used for working capital and other general corporate purposes. Interest
accrues at the greater of 13.0% or LIBOR plus 6.0% with interest payments due
monthly. The principal amount outstanding along with any accrued interest is due
in June, 2002. We cannot re-borrow amounts repaid under this facility. In
connection with this facility, we also issued to Goldman Sachs Credit Partners
L.P. a warrant to acquire 375,000 shares of common stock at an exercise price of
$15.00 per share. As of June 30, 1999 we had borrowed the full amount available
under this facility.
5. SERIES A PREFERRED STOCK:
In March 1999, we sold 800,000 shares of Series A Convertible Preferred
and warrants to purchase 958,333 shares of our common stock to various
affiliates of the Sandler/21st Century Group for total consideration of $20.0
million. The Series A Convertible Preferred Stock automatically converted into
2,666,677 shares of common stock upon the completion of our initial public
offering which closed on July 23, 1999. The proceeds from the sale, net of
related offering costs were $19.2 million. One of our directors, Michael
Marocco, is a principal of several of the entities in Sandler Capital. Mr.
Roland Casati, another director, also purchased shares of Series A Convertible
Preferred Stock.
We have 1,000,000 shares of preferred stock authorized none of which were
outstanding as of December 31, 1998 and 800,000 of which were outstanding as of
June 30, 1999.
7
<PAGE>
6. BUSINESS SEGMENTS:
We classify our business into five fundamental areas: data services, voice
services, Enterprise Network Services, data products and voice products. Senior
management evaluates and makes operating decisions about each of these operating
segments based on a number of factors. We do not account for assets by business
segment and, therefore, depreciation and amortization are not factors used in
evaluating operating performance. Two of the more significant factors used in
evaluating our operating performance are: revenue and gross margin before
depreciation as presented below:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ----------------------------------
1998 1999 1998 1999
---------------- ----------------- ---------------- -------------
Revenue: (in thousands)
<S> <C> <C> <C> <C>
Data services................................... $ 622 $ 2,142 $ 1,430 $ 4,261
Voice services.................................. 1,167 13,493 2,050 25,951
Enterprise Network Services..................... 634 1,097 750 1,830
Data products................................... 5,388 8,641 9,850 15,803
Voice products.................................. 171 11,251 425 19,260
---------------- ----------------- ---------------- -------------
Total revenue................................ 7,982 36,624 14,505 67,105
---------------- ----------------- ---------------- -------------
Gross margin before depreciation:
Data services................................... 306 1,317 753 2,304
Voice services.................................. 307 6,569 691 11,819
Enterprise Network Services..................... 435 963 496 1,554
Data products................................... 1,101 1,433 1,841 2,228
Voice products.................................. 61 3,690 154 6,474
---------------- ----------------- ---------------- -------------
Total gross margin before depreciation....... 2,210 13,972 3,935 24,379
---------------- ----------------- ---------------- -------------
Reconciliation to net loss:
Selling, general and administrative............. (7,711) (27,410) (13,772) (50,748)
Depreciation and amortization................... (1,190) (4,108) (1,953) (6,970)
Operating loss.................................. (6,691) (17,546) (11,790) (33,339)
Interest expense................................ (5,830) (6,149) (5,882) (12,086)
Interest income................................. 1,349 770 1,380 1,721
Other income, net............................... 3 (403) 13 (311)
---------------- ----------------- ---------------- -------------
Net loss..................................... $ (11,169) $ (23,328) $ (16,279) $ (44,015)
================ ================= ================ =============
</TABLE>
7. NET LOSS PER SHARE:
The net loss available to common shareholders and weighted average shares
consists of the following:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------- ----------------------------------------
1998 1999 1998 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
(in thousands)
Net loss $ (11,169) $ (23,328) $ (16,279) $ (44,015)
================== ================== ================== ==================
Weighted average common shares
used for basic and diluted
earnings per share 13,360 14,253 27,131 28,198
Warrants -- -- -- --
Stock options -- -- -- --
------------------ ------------------ ------------------ ------------------
Weighted average number
of shares outstanding
(basic and diluted) 13,360 14,253 27,131 28,198
================== ================== ================== ==================
</TABLE>
As of June 30, 1998 and 1999 a total of 7,794,282 and 9,777,115, options
and warrants were outstanding which were not considered in the above
calculations as their effect would have been anti-dilutive.
8
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. SUBSEQUENT EVENTS:
On July 20, 1999, we completed a one-for-two reverse split of our common
stock. The accompanying consolidated financial statements and related
disclosures have been restated for all periods presented to reflect the reverse
stock split.
In July 1999, we entered into a six-year $103.5 million credit facility
with Cisco Systems Capital Corporation. This credit facility will provide the
financing for the purchase and installation of our Cisco Systems, Inc. multi-
service data and voice switching platform and for other Cisco equipment. Under
the terms of this agreement, Cisco Systems, Inc. also received a warrant to
purchase 575,000 shares of our common stock. The warrant has an exercise price
of $15.00 per share and is exercisable for three years from the date of
issuance. The facility will be available in three tranches over a three year
period with quarterly payments due over three years beginning one year from the
availability of each tranche.
In July 1999, we completed an initial public offering of our common stock
in which 9,660,000 shares, including 723,271 shares sold by selling
shareholders, were sold at an offering price of $15.00 per share. We received
proceeds from the offering of approximately $122.7 million, net of selling
shareholders ($10.8 million), underwriting discount ($10.1 million), and
offering expenses ($1.2 million).
9
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the accompanying footnotes included in this Form 10-Q.
This discussion includes forward-looking statements and is based on current
expectations which involve risks and uncertainties. Because of the uncertainty
of many factors, what actually occurs in the future may be very different from
what we project in our forward-looking statements.
Overview
We are a rapidly growing national provider of single-source data and voice
communications systems, services and solutions primarily to businesses with 25
to 500 employees. Inside our customers' premises we own communications networks
and provide professional services, such as the design, installation, management
and monitoring of those networks to our customers. Outside our customer'
premises, we provide a full range of data and voice transport services. By
operating networks, both inside and outside our customers' premises, and by
offering a broad range of data and voice products and services, we enable small
and medium sized businesses to use state-of-the-art communications solutions,
including data and voice networks based on Internet Protocol, electronic
commerce, the Internet and sophisticated communications systems. We offer each
of our products and services on a stand-alone basis and are now offering a
bundled communications solution, which we call Enterprise Network Services, in
which we design, install, own, manage and monitor the data and voice networks
inside our customers' premises and provide communications services outside our
customers' premises.
We were first capitalized on March 1, 1996. Since that time, we have
successfully raised $338.6 million in capital, including $450,000 in founder's
capital, $24.0 million in two private placements of common stock in 1996 and
1997 (including an additional $450,000 from the founders), $160.0 million
through the 1998 sale of our 13% Senior Notes and related warrants, $20.0
million in a 1999 sale of our convertible preferred stock and warrants to
affiliates of Sandler Capital and $134.1 million in our July 1999 initial public
offering of common stock. As a result of the investment in our preferred stock,
we also have increased the borrowing capacity under our existing Comdisco
equipment lease facility by $20.0 million to a total of $30.0 million. In
addition, in June 1999, we entered into a $10.0 million senior secured credit
facilty with Goldman Sachs Credit Partners L.P. and in July we entered into a
six year $103.5 million equipment financing facility with Cisco Systems Capital
Corporation.
In the last three years, we completed 15 strategic acquisitions, the most
significant of which was the 1998 acquisition of substantially all of the assets
of Tie Communications, Inc. at a cost of approximately $51.4 million. With the
acquisition of these assets, we accelerated our growth by adding 24 new markets
and 452 employees with experience in voice products and services. This
acquisition also gave us the opportunity to cross-market our data products and
services, including Enterprise Network Services, to the approximately 77,000
customers that purchased products or services from Tie in the past.
We began offering Enterprise Network Services in December 1997 and have now
entered into long-term Enterprise Network Service contracts with 23 customers.
We expect these contracts will provide us with approximately $16.2 million in
total revenue over their terms. Although these contracts may be canceled by the
customer, exposing us to risks related to remarketing, cancellation requires
payment of a fee designed to reimburse us for all or substantially all of our
costs incurred in entering into the contract.
10
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-- (Continued)
Description of Financial Components
We classify our business into five segments: data services, voice services,
Enterprise Network Services, data products and voice products.
Revenue and cost of sales. The following chart outlines the components of
revenue and the related cost of sales excluding depreciation, by segment.
<TABLE>
<CAPTION>
Revenue Cost of Sales (excluding depreciation)
-------- --------------------------------------
<S> <C>
Data Services
Professional Services
web design and hosting and network . engineer and technician compensation and
planning, design, maintenance, and benefits
monitoring
Network Services
frame relay (ATM and IP switching), . leased line costs of connecting a customer to a
Internet access and web hosting long distance or local network
. capacity charges that long distance and local
carriers, Internet providers and others impose to
use their equipment and network
--------------------
Voice Services
Professional Services
network planning, design, maintenance . engineer and technician compensation and
and monitoring benefits
Network Services
long distance service, local telephone . leased line facilities' costs of connecting a
service and public phone service customer to a long distance or local network
. capacity charges that long distance and local
carriers, Internet service providers and others
impose to use their equipment and network
--------------------
Enterprise Network Services
long-term contracts (typically three to five . all the costs associated with all the data and voice
years) under which we own, manage and products and services described in this table
are responsible for all or a portion of the
network inside our customers' premises
--------------------
Data Products
sale and installation of network . cost of data network equipment
equipment . costs of installation, including technician
compensation and benefits.
--------------------
Voice Products
sale and installation of network . cost of voice network equipment
equipment . costs of installation, including technician
compensation and benefits.
</TABLE>
11
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-- (Continued)
Selling, general and administrative expenses have increased significantly and
will continue to increase as we recruit additional management and support
personnel necessary for continued growth. The Tie acquisition contributed
substantially to this increase. However, we expect these expenses to decline as
a percentage of our revenue as we expand our customer base and begin selling
additional products and services in each of our markets.
. Sales and marketing expenses include commissions paid in connection with
our sales programs, marketing salaries and benefits, travel expenses, trade
show expenses, consulting fees and promotional costs. Also included are the
costs of soliciting potential customers such as telemarketing, brochures,
targeted advertising and promotional campaigns. We expect these expenses to
increase as we add additional sales and marketing personnel and further
implement our business plan.
. General and administrative expenses primarily consist of salaries and
related expenses of management and support services personnel, occupancy
fees, professional fees and general corporate and administrative expenses.
We also include costs associated with the development, support and expected
enhancements of our operational support software platform, to the extent
these costs are not capitalized.
Depreciation and amortization expense includes depreciation of property,
network and equipment (over two to five years), including our assets located
inside our customers' premises provided under Enterprise Network Services
contracts. Amortization expense includes the amortization of intangible assets
(over three to ten years), primarily goodwill (over ten years), that result from
business acquisitions. We had $50.1 million of goodwill, net of amortization, on
June 30, 1999. Depreciation and amortization will increase as we install
additional ePOP switching platforms and expand our Enterprise Network Services
business and as a result of increased amortization of intangibles expected to
result from future acquisitions.
Interest expense includes interest expense on our short-term and long-term
debt, including capital leases. The majority of the interest expense is related
to our 13% Senior Notes which mature in 2008. Interest expense will increase as
we continue to finance a significant portion of our capital expenditures,
including our purchase of Cisco Systems Inc.'s multi-service, data and voice
switches and additional Cisco equipment under the $103.5 million equipment
facility with Cisco Systems Capital Corporation and as a result of the Goldman
Sachs Credit Facility.
12
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-- (Continued)
Results of Operations
Management evaluates and makes operating decisions about each of our operating
segments based on a number of factors. Two of the more significant factors we
use in evaluating operating performance are: revenue and gross margin before
depreciation. We do not account for assets by business segment and, therefore,
depreciation and amortization are not factors used by management in evaluating
operating performance.
The percentages shown in the following table with respect to revenue represent
revenue for each business segment as a percentage of total revenue. Percentages
with respect to cost of sales excluding depreciation and gross margin before
depreciation are of the revenue for the related segment.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------- --------------------------------------
1998 1999 1998 1999
------------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(dollars in thousands)
Revenue:
Data services........................... $ 622 8% $ 2,142 6% $ 1,430 10% $ 4,261 6%
Voice services.......................... 1,167 15 13,493 37 2,050 14 25,951 39
Enterprise Network Services............. 634 8 1,097 3 750 5 1,830 3
Data products........................... 5,388 67 8,641 24 9,850 68 15,803 24
Voice products.......................... 171 2 11,251 31 425 3 19,260 29
---------- ------ --------- ------ -------- ----- --------- -----
Total revenue........................ $ 7,982 100% $36,624 100% $14,505 100% $67,105 100%
---------- ------ --------- ------ -------- ----- --------- -----
Cost of sales excluding depreciation:
Data services........................... $ 317 51% $ 825 39% $ 678 47% $ 1,957 46%
Voice services.......................... 859 74 6,924 51 1,358 66 14,132 54
Enterprise Network Services............. 199 31 134 12 254 34 276 15
Data products........................... 4,287 80 7,208 83 8,009 81 13,575 86
Voice products.......................... 110 64 7,561 67 271 64 12,786 66
--------- --------- -------- ---------
Total cost of sales excluding
depreciation $ 5,772 72% $22,652 62% $10,570 73% $42,726 64%
--------- --------- -------- ---------
Gross margin before depreciation:
Data services........................... $ 306 49% $ 1,317 61% $ 753 53% $ 2,304 54%
Voice services.......................... 307 26 6,569 49 691 34 11,819 46
Enterprise Network Services............. 435 69 963 88 496 66 1,554 85
Data products........................... 1,101 20 1,433 17 1,841 19 2,228 14
Voice products.......................... 61 36 3,690 33 154 36 6,474 34
--------- --------- -------- ---------
Total gross margin before
depreciation........................ $ 2,210 28% $13,972 38% $ 3,935 27% $24,379 36%
========= ========= ======== =========
</TABLE>
13
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-- (Continued)
Summary Quarterly Financial Data
The table below presents unaudited quarterly statement of operations data for
each of the nine quarters through June 30, 1999. This information has been
derived from unaudited financial statements that have been prepared on the same
basis as the audited financial statements contained in our 1998 Form 10-K and,
in our opinion, includes all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of the
information. The operating results for any quarter are not necessarily
indicative of results for any future periods.
<TABLE>
<CAPTION>
1997 1998
------------------------------- ---------------------------------------------
2nd 3rd 4th 1st 2nd 3rd 4th
--------- --------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Operating Statement Data:
Revenue................................... $ 2,020 $ 3,144 $ 4,448 $ 6,523 $ 7,982 $ 22,316 $ 24,779
Cost of sales excluding depreciation...... 1,359 2,209 3,423 4,798 5,772 14,717 18,416
Selling, general and administrative....... 1,974 3,052 4,769 6,062 7,710 15,507 18,583
Depreciation and amortization............. 233 296 701 762 1,191 2,646 2,894
------- ------- ------- ------- -------- -------- --------
Operating loss............................ (1,546) (2,413) (4,445) (5,099) (6,691) (10,554) (15,114)
Net loss................................... $(1,586) $(2,817) $(4,166) $(5,111) $(11,169) $(15,355) $(18,941)
======= ======= ======= ======= ======== ======== ========
EBITDA (1)................................. $(1,313) $(2,117) $(3,744) $(4,337) $ (5,500) $ (7,908) $(12,220)
======= ======= ======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1999
---------------------
1st 2nd
-------- ---------
<S> <C> <C>
(in thousands)
Operating Statement Data:
Revenue................................... $ 30,481 $ 36,624
Cost of sales excluding depreciation...... 20,074 22,652
Selling, general and administrative....... 23,337 27,411
Depreciation and amortization............. 2,863 4,107
-------- ---------
Operating loss............................ (15,793) (17,546)
Net loss................................... $(20,687) $(23,328)
======== =========
EBITDA (1)................................. $(12,930) $(13,439)
======== =========
</TABLE>
(1) EBITDA consists of earnings before interest (net), income taxes,
depreciation and amortization and other income (expense). EBITDA is a
measure commonly used to analyze companies on the basis of operating
performance. It is not a measure of financial performance under GAAP and
should not be considered as an alternative to net income (loss) as a
measure of performance or as an alternative to cash flow as a measure of
liquidity. Our measure of EBITDA may not be comparable to similarly titled
measures used by other companies.
We have generated greater revenue in each successive quarter since our
inception, reflecting increases in the number of customers, mainly due to
acquisitions, and in sales to existing customers. Cost of sales excluding
depreciation has increased in every quarter, reflecting product and service
costs directly associated with the increases in revenue. Our selling, general
and administrative expenses have increased in every quarter and reflect sales
and marketing costs such as sales commissions, and the development and growth of
regional and corporate support staff. Depreciation and amortization increased in
each quarter through December 31, 1998 and again in the quarter ended June 30,
1999. The increases in depreciation are due to the purchase of property, network
and equipment both inside and outside our customers' premises associated with
our expansion from one to 35 markets since inception, and due to the deployment
of our multi-service data and voice switching platform in three markets. The
increases in amortization are due to the increase in goodwill and other
intangible assets resulting from the completion of 15 acquisitions through June
30, 1999. We have also experienced increasing operating and net losses every
quarter. However, net loss has declined as a percentage of revenue from 79% for
the second quarter of 1997 to 64% of revenue for the second quarter of 1999.
Results of Operations
Revenue for the second quarter of 1999 was $28.6 million greater than revenue
for the second quarter of 1998 and revenue for the six months ended June 30,
1999 was $52.6 million greater than revenue for the six months ended June 30,
1998. The increase in revenue was primarily due to the addition of 27 new
markets through acquisitions between June 30, 1998 to June 30, 1999. The
increase in revenue was also due to internal growth of our operations and sales
staff. Our most significant acquisition was the acquisition of the assets of Tie
Communications, which occurred in the third quarter of 1998. The Tie acquisition
contributed to the sizable increase in voice services revenue and voice product
revenue. The increase in data products was primarily a result of the development
and growth of existing markets and a result of the expansion of data services
markets from eight at June 30, 1998 to 13 at June 30, 1999. As a result of the
Tie acquisition, and our continued strategy to increase our service offerings,
our overall revenue mix shifted from approximately 29% in services for the six
months ended June 30, 1998, to 48% for the six months ended June 30, 1999 and
46% in services for the second quarter of 1999. A significant factor in our
strategy to increase services is through our Enterprise Network Services
offering. As of June 30, 1999 we had 23 customers, representing $16.2 million in
revenue over the terms of their contracts compared to 13 customers and $11.9
million in contract term revenue as of June 30, 1998.
14
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-- (Continued)
Cost of sales excluding depreciation increased $16.9 million from the second
quarter of 1998 to the second quarter of 1999 and increased $32.2 million from
the six months ended June 30, 1998 to the six months ended June 30, 1999, while
declining as a percentage of total revenue from 73% for the six months ended
June 30, 1998 to 64% for the six months ended June 30, 1999 and to 62% for the
second quarter of 1999. This decline as a percentage of total revenue is a
reflection of the decline in cost of sales excluding depreciation for both
products and services. Cost of product sales excluding depreciation declined as
a percentage of product revenue, from 79% for the second quarter of 1998 to 74%
for the second quarter of 1999 and from 80% for the first six months of 1998 to
75% for the first six months of 1999. This decrease as a percentage of product
revenue is due to an increase in sales of voice products which have a lower
related cost of sales excluding depreciation than data products. Cost of service
sales excluding depreciation as a percentage of service revenue, decreased from
57% for the second quarter of 1998 to 47% for the second quarter of 1999 and
from 54% for the first six months of 1998 to 51% for the first six months of
1999. The decrease in cost of service sales excluding depreciation as a
percentage of service revenue was primarily due to an increase in in our
offering of professional services such as network and web, design, maintenance
and monitoring which have a lower related cost.
Selling, general and administrative expenses increased $19.7 million from the
second quarter of 1998 to the second quarter of 1999 and increased $37.0 million
from the six months ended June 30, 1998 to the six months ended June 30, 1999.
However, selling, general and administrative expenses declined as a percentage
of revenue from 95% for the first six months of 1998 to 76% for the first six
months of 1999 and further declined to 75% of revenue for the second quarter of
1999. We expect selling, general and administrative expenses to continue to
decrease as a percentage of revenue as we expand our customer base and begin
selling additional products and services in each of our markets.
The increases in selling, general and administrative were primarily a result
of:
. the expansion from eight to 35 markets;
. the completion of three acquisitions;
. an increase from 274 employees at June 30, 1998 to 1,206 at June 30, 1999
(452 of which were hired as a result of the Tie acquisition); and
. continued growth of the support services organization required to support
expanding field operations, which accounted for approximately $12.5 million
or 46% of total selling, general and administrative expenses for the three
months ended June 30, 1999 and $23.7 million or 47% of total selling,
general and administrative expenses for the six months ended June, 1999.
Depreciation and amortization expense increased approximately $2.9 million
from the second quarter of 1998 to the second quarter of 1999 and increased $5.0
million from the first six months of 1998 to the first six months of 1999. These
increases are a direct result of increases of $30.1 million in property, network
and equipment. In addition, goodwill increased $45.4 million as a result of the
acquisitions completed between June 30, 1998 and June 30, 1999 and other
intangible assets increased $3.2 million. As of June 30, 1999 we had $50.1
million in goodwill, net of amortization, which is being amortized over ten
years. The increase in property, network and equipment is largely due to:
. the expansion from eight to 35 markets;
. the development and deployment of our multi-functional, integrated data and
voice switching platform
. continued development of our operational support system;
. the increase in assets managed under Enterprise Network Services contracts;
and
. office equipment and furniture related to the growth of our support services
organization.
Interest expense increased by approximately $320,000 from the second quarter
of 1998 to the second quarter of 1999 and increased $6.2 million from the six
months ended June 30, 1998 to the six months ended June 30, 1999. The
15
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-- (Continued)
large increase for the six month periods is primarily a result of a full six
months of interest expense in 1999 compared to three months of interest in 1998
on $160.0 million in principal amount of our 13% Senior Notes issued in April
1998. The increase is also a result of assumed indebtedness from acquisitions
and increased indebtedness under our equipment financing facilities with
Comdisco and Sun Financial Group, Inc. due to property, network and equipment
purchased for our networks both inside and outside our customers' premises.
Interest expense will increase as we continue to finance a significant portion
of our capital expenditures, including equipment purchased for installation at
our customers' offices in connection with the provision of Enterprise Network
Service, equipment purchased under our $103.5 million equipment facility with
Cisco Systems Capital Corporation and as a result of $10.0 million in increased
indebtedness as a result of the Goldman Sachs Credit Partners L.P. senior
secured credit facility.
Interest income decreased approximately $578,000 from the second quarter of
1998 to the second quarter of 1999 and increased $341,000 from the six months
ended June 30, 1998 to the six months ended June 30, 1999. The decline in
interest income for the second quarter comparison is a result of the decline in
cash, cash equivalents, short-term investments and restricted cash due to our
continued use of the proceeds from the offering of the 13% Senior Notes for
working capital requirements, capital expenditures, acquisitions and debt
payments. However the increase from the first six months of 1998 to the first
six months of 1999 is due to a full six months interest earned in 1999 on the
remaining proceeds from the $160.0 million in principal amount of our 13% Senior
Notes issued in April 1998 and interest earned on the proceeds from the sale of
convertible preferred stock in March 1999 compared to three months of interest
earned in 1998.
Interest income will increase in the third quarter of 1999 due to the
temporary investment of the proceeds from our Initial Public Offering in July
1999, prior to their use in our business.
Other income (expense), net which consists of miscellaneous other non-
operating types of income and expenses, decreased from net other income of
approximately $3,000 for the second quarter of 1998 to net other expense of
approximately $403,000 for the second quarter of 1999 and decreased from net
other income of approximately $13,000 for the six months ended June 30, 1998 to
net other expense of approximately $311,000 for the six months ended June 30,
1999. This change is primarily due to a loss recognized on the termination of a
stock purchase agreement and sale of an investment.
16
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-- (Continued)
Liquidity and Capital Resources
Since inception, in addition to borrowing under our credit facilities we have
funded our net losses and capital expenditures through financing activities as
outlined in the following table. In the table below, net proceeds equals the
gross proceeds of the offering less advisors' fees, underwriting discounts and
other expenses associated with the offering.
<TABLE>
<CAPTION>
Securities Sold Gross Proceeds Net Proceeds
- --------------- ----------------- -----------------
<S> <C> <C>
Initial sale of 3,750,000 shares of common stock to founders (April through
October 1996)................................................................... $ 450,000 $ 450,000
3,500,000 shares of common stock and 1,750,000 warrants (December 1996
through February 1997) 7,000,000 6,295,794
3,410,000 shares of common stock and 1,705,000 warrants (October through
November 1997).................................................................. 17,050,000 15,339,787
13% Senior Notes and 864,000 warrants (April 1998)............................... 160,000,000 152,377,955
Sale of 800,000 shares of Series A Convertible Preferred Stock and 958,333
warrants (March 1999)........................................................... 20,000,000 19,206,378
Initial Public Offering of 8,936,729 shares of common stock, net of selling
shareholders shares (July 1999)................................................. 134,050,935 122,737,700
----------------- -----------------
Total funds raised.......................................................... $ 338,550,935 $ 316,407,614
================= =================
</TABLE>
Our principal uses of cash are to fund working capital requirements, capital
expenditures, business acquisitions and operating losses. We expect that our
expansion will require additional capital expenditures and direct operating
costs and expenses. As a result, we expect to incur net losses for at least the
next 30 months. However, if our customer base grows and we are successful in
offering all of our data services and products, we believe revenue will increase
in a larger proportion to operating expenses.
As of June 30, 1999, we had current assets of $78.6 million, including cash
and cash equivalents of $11.2 million, short-term investments of $8.0 million
and restricted cash of $20.8 million, and working capital of $17.2 million. In
addition, we also had $22.5 million in non-current restricted cash. The majority
of our restricted cash, along with the interest we earn on this cash, will be
used to make the interest payments through April 2001 on our 13% Senior Notes.
We invest excess funds in short-term investments until these funds are needed
for capital investments, acquisitions and operations of the business.
Cash Flows From Operating Activities: Operating activities used cash of
approximately $38.0 million during the six months ended June 30, 1999 and $8.8
million during the six months ended 1998. The majority of this increase was due
to a net loss of $44.0 million and a combined increase in trade accounts
receivable, inventory and prepaid and other current assets of approximately $6.6
million, which were partially offset by non-cash expenses including depreciation
and amortization, stock compensation and amortization of financing costs
aggregating $10.5 million and a net increase in current liabilities including
trade accounts payable, accrued liabilities and deferred revenue of $2.1
million. Cash used in operating activities for the first six months of 1998 was
primarily due to our net loss of $16.3 million and a combined increase in
current assets including trade accounts receivable and inventory of $5.2
million, partially offset by an increase in accrued interest of $5.2 million,
increases to current liabilities of $4.3 million and non-cash expenses
aggregating 3.2 million.
Cash Flows From Investing Activities: Investing activities used cash of $5.3
million during the six months ended June 30, 1999 and $140.7 million during the
six months ended June 30, 1998. Cash used in investing activities during the
first six months of 1999 primarily consisted of short-term investments of $8.0
million, business combinations of $2.0 million, investment in leases of $2.1
million and capital expenditures of $1.3 million. These investing outflows were
17
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-- (Continued)
partially offset by $8.1 million provided from maturities in restricted cash
which were used to make interest payments. An additional $10.5 million of
capital expenditures were financed under our financing facilities. The large
amount of cash used in investing activities during the first six months of 1998
was a result of the investment of the proceeds from the $160.0 million Senior
Notes, $73.7 million of which was invested in short-term investments, pending
their use in our business and $56.8 million was invested and is classified as
restricted cash pending its use for interest payments on the Senior Notes, two
of which had been made as of June 30, 1999. In addition, $2.7 million was
classified as restricted cash as a result of the issuance of letters of credit,
$5.6 million was used for capital expenditures and approximately $1.6 million
was used for business combinations.
Not reflected in investing activities is the acquisition of Choice Solutions,
Inc. (CSI) in July 1999. CSI was a provider of data network integration services
based in Dallas, Texas. The purchase price consisted of $1.1 million in cash and
15,000 shares of our common stock. Additional shares may be issued if certain
financial objectives are met.
Cash Flows From Financing Activities: Financing activities provided cash of
approximately $29.0 million during the first six months of 1999 and
approximately $153.1 million during the first six months of 1998. Cash provided
by financing activities during 1999 consisted of approximately $19.2 million in
net proceeds from the sale of our convertible preferred stock, $9.5 million in
net proceeds from borrowing under the senior secured credit facility and $5.4
million in new proceeds from the exercise of options and warrants, which was
partially offset by approximately $5.1 million in payments on long-term
borrowings. Cash provided by financing activities during the first six months of
1998 consisted of $154.2 million in net proceeds from the sale of the $160.0
million Senior Notes, net of $1.3 million in payments on long-term notes payable
and capital leases.
In November 1997, we entered into an agreement with Comdisco, Inc. through
which we can receive up to $50.0 million of equipment lease financing. At June
30, 1999, $30.0 million was available to us under this facility of which a total
of approximately $14.6 million had been utilized. This facility will expire on
June 30, 2000. The remaining $20.0 million will become available upon the
satisfaction of additional conditions.
On April 2, 1998, we completed the offering of our 13% Senior Notes, in the
aggregate principal amount of $160.0 million and warrants to purchase 864,000
shares of common stock. At the closing, we deposited $56.8 million of the
proceeds from that offering in a collateral account. The amount in the
collateral account along with the interest earned will be sufficient to pay the
first six interest payments on the 13% Senior Notes, the second of which was
made on April 1, 1999. We received approximately $95.6 million after deducting
offering costs of approximately $7.6 million and funding the collateral account.
The 13% Senior Notes contain certain covenants that restrict our ability to
incur additional debt and make certain payments, including dividends.
In March 1999, we sold to affiliates of the Sandler Capital 800,000 shares of
Series A Convertible Preferred Stock and warrants to purchase 958,333 shares of
our common stock, for total consideration of $20.0 million. The warrants have an
exercise price of $15.00 per share and are exercisable for five years. The
proceeds from the sale, net of related offering costs, were approximately $19.2
million.
In June 1999,we entered into a $10.0 million senior secured credit facility
with Goldman Sachs Credit Partners L.P. The proceeds of this facility will be
used for working capital and other general corporate purposes. We cannot re-
borrow amounts repaid under this facility. In connection with this facility, we
also issued to Goldman Sachs Credit Partners L.P. a warrant to acquire 375,000
shares of common stock at an exercise price of $15.00 per share. As of June 30,
1999 we had borrowed the full amount under this facility.
In July 1999, we entered into a six-year $103.5 million credit facility with
Cisco Systems Capital Corporation. This credit facility will provide the
financing for the purchase and installation of our Cisco Systems, Inc. multi-
service data and voice switching platform and for other Cisco equipment. Under
the terms of this agreement, Cisco Systems, Inc. also received a warrant to
purchase 575,000 shares of our common stock. The warrant has an exercise price
of $15.00 per
18
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-- (Continued)
share and is exercisable for three years from the date of issuance. The facility
will be available in three tranches over a three year period with quarterly
payments due over the three years beginning one year from the availability of
each tranche.
In July 1999 we completed an initial public offering of our common stock in
which 9,660,000 shares, including 723,271 shares sold by selling shareholders,
were sold at an offering price of $15.00 per share. We received proceeds from
the offering of approximately $122.7 million, net of selling shareholders
proceeds ($10.8 million), underwriting discount ($10.1 million), and offering
expenses ($1.2 million).
In addition, we have a financing agreement with Sun Financial Group, Inc. a
subsidiary of GATX Capital Corporation, that was used to finance our internal
capital needs under which $5.0 million was outstanding on June 30, 1999. We also
have an agreement with GE Capital Fleet Services for financing purchases of
company vehicles, $1.2 million was outstanding under this facility as of June
30, 1999.
Future Capital Requirements. We have significant debt in relation to our
equity. At June 30, 1999, we had $189.1 million in debt and $57.2 million in
shareholders' deficit, which includes paid-in capital of $47.3 million, but
excluded $19.2 million in convertible preferred stock classified outside of
shareholders' equity. Upon the completion of our Initial Public Offering in July
1999, we received an additional $122.7 million of paid-in-capital from the sale
of common shares, net of underwriter's discount and other costs, and $19.2
million in convertible preferred stock was converted to common stock. Our
business plan will continue to require a substantial amount of capital to fund
our expansion of existing and acquired markets. Our business plan includes the
following:
. deploying our multi-functional converged data and voice switching platform
in all of our markets and leasing of our IP/ATM network connecting our
switches;
. funding the purchase, installation and ownership of our Enterprise Network
Services customers networks (which includes providing our customers with
all necessary hardware, software, transmission facilities and management
maintenance and monitoring);
. continuing to develop customer care and sales organizations;
. continuing to develop our operational support system; and
. funding operating losses and debt service requirements.
In addition, we will continue to evaluate acquisitions and investments.
Completing additional acquisitions and investments could require us to spend a
portion of our cash, and compel us to raise additional capital sooner.
We estimate that our existing funds at June 30, 1999, the proceeds from our
July initial public offering, our available borrowing and lease financing
capacity and the proceeds from the exercise of warrants in July will be
sufficient to meet our capital requirements for the foreseeable future. We
could, however, require additional capital sooner due to material shortfalls in
our operating and financial performance or if we are more aggressive in our
expansion than currently contemplated. We cannot be certain that we would be
successful in raising sufficient debt or equity capital to fund our operations
on a timely basis or on acceptable terms. If needed financing were not available
on acceptable terms, we could be compelled to alter our business strategy, or
delay or abandon some of our future plans or expenditures or fail to make
interest payments on our debt. Any of these events would have a material adverse
effect on our financial condition, results of operations and liquidity.
Impact of the Year 2000 Issue
The year 2000 issue generally describes the various problems that may result
from the improper processing of dates and date-sensitive calculations by
computers and other equipment as a result of computer hardware and software
using two digits to identify the year in a date. Those computers and software
will need to be upgraded or replaced to accept four
19
<PAGE>
CONVERGENT COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS-- (Continued)
digit dates to distinguish dates in the 21st century from dates in the 20th
century. The problem could result in system failures or miscalculations and
cause disruptions in operations including, among other things, the inability to
process transactions, send invoices, provide data and voice communications
services or engage in similar normal business activities.
State of Readiness. We have created a task force (consisting of
representatives from our information technology, product management, sales and
marketing, finance and legal departments) that evaluates our internal and
external systems as they relate to year 2000 issues. We have reviewed our
critical internal systems, including our systems for customer billing, customer
service and financial reporting. We have obtained year 2000 readiness
certifications from most manufacturers and suppliers of our internal systems.
Any internal systems which were identified as having a potential problem have
already been replaced or are in the process of being replaced or modified.
Except for portions of two systems relating to order entry procedures which we
acquired in two of the acquisitions we made in the last year (Tie and KCI), we
believe that our internal systems are year 2000 ready. We are in the process of
upgrading the two systems based upon the manufacturer's recommendation, which
should be completed by the third quarter of 1999.
We continue to assess internal non-information technology systems and external
systems, including systems used by manufacturers and suppliers of computer
equipment, software programs, telephone systems, data systems, systems
comprising our enterprise networks and equipment used to provide services to our
customers.
To date, we have not identified any year 2000 issues with third-parties which
could have a material adverse effect on our business. We may identify a
significant internal or external year 2000 issue in the future which, if not
remediated in a timely manner, could have a material adverse effect on our
business, financial condition and results of operations.
Costs. We have not incurred any significant costs in identifying year 2000
issues other than the opportunity cost of the time spent by our personnel. We do
not anticipate any significant further costs in identifying year 2000 issues.
Programming costs associated with conforming the two non-ready systems are
estimated to be approximately $500,000. We have prepared contingency plans,
including manual order entry procedures and identification of potential software
modifications, in the event that there are delays in moving the information from
the non-ready systems to our year 2000 systems. Costs associated with our
contingency plans could include the hiring of additional personnel to process
orders and implement software modifications. The exact amount of the costs
associated with our contingency plans cannot be determined at this time as a
result of not knowing the number of additional personnel that may need to be
hired.
Risks of Year 2000 Issues. Based on our assessments to date, we believe that
we will not experience any material disruption in internal systems or
information processing as a result of year 2000 issues. However, almost all of
our systems and products relating to our internal and external systems and
products are manufactured or supplied by third parties which are outside of our
control. Although we have taken steps that we believe should have identiied
potential year 2000 issues, if some or all of our internal or external systems
and products fail, or if any critical systems are overlooked or are not year
2000 ready in a timely manner, there could be a material adverse effect on our
business, financial condition or results of operations. In addition, if a
critical provider of services, such as those providers supplying electricity,
water or other services, or a vendor or manufacturer supplying products sold to
our customers, experiences difficulties resulting in disruption of services to
us or the sale of malfunctioning products to our customers, there could be a
material adverse effect on our business. Potential risks include
. the disruption of utility services resulting in a closure of the affected
facility for the duration of the disruption;
. the disruption of data or voice services we provide to our customers;
. the inability to process customer billing accurately or in a timely manner;
. the inability to provide accurate financial reporting to management,
auditors, investors and others;
. litigation costs associated with potential suits from customers and
investors; and
. delays in implementing other projects as a result of work by internal
personnel on year 2000 issues.
20
<PAGE>
Part II
Item 1. Legal Proceedings
We are is involved in legal proceedings from time to time, none of which we
believe, if decided adversely to us, would have a material adverse effect on our
business, financial condition or results of operations.
Item 2. Changes in Securities
<TABLE>
<CAPTION>
<C>
Underwriters Number of Common Stock
or Class of Shares of Warrants/ Other Exemption
Date Purchasers Common Stock Options Securities Consideration Claimed
- ---- ----------------- ------------ ------------ ---------- --------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
April 19, 1999 Sellers in an 74,000 Substantially all Section 4(2)
acquisition of the assets of the
target company
April 19, 1999 to Employee options 33,000 $85,000 Rule 701
May 18, 1999 exercised
April 23, 1999 to Warrants exercised 1,366,975 $4,952,586 Section 4(2)
June 25, 1999
May 26, 1999 Sellers in an 19,850 Substantially all Section 4(2)
acquisition of the assets of the
target company
June 3, 1999 Credit facility 750,000 $10.0 million Section 4(2)
provider credit facility
</TABLE>
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) May 28, 1999 - Annual Meeting of the Shareholders.
(b) Directors elected at the meeting: Spencer I. Browne (Class III) and
Richard Tomlinson Ph.D. (Class III).
Directors continuing: John R. Evans (Class I), Keith V. Burge (Class I),
Philip G. Allen (Class II), Roland Casati (Class II) and Michael J.
Marocco (Class II)
(c) Matters voted upon at the Annual Meeting of the Shareholders.
<TABLE>
<CAPTION>
Votes Cast
For Against Abstain
<S> <C> <C> <C> <C>
1 Election of Class III Directors.
Richard Tomlinson Ph.D. 15,731,572 65,000 208,333
Spencer I. Browne 15,731,572 65,000 208,333
2 Ratify Appointment of PricewaterhouseCoopers, LLP as auditors. 15,741,572 65,000 198,333
3 Approve Second Amendment to the 1998 Stock Option Plan increasing 15,431,794 222,500 350,611
the number of shares reserved for issuance upon exercise of options
granted under the plan.
4 Approve 1999 Employee Stock Option Plan. 15,418,072 288,500 298,333
5 Approve 1999 Director Stock Option Plan. 15,350,794 330,778 323,333
6 Approve Reverse Split Amendments to the Articles of Incorporation 15,457,627 262,278 285,000
granting the Directors the authority to file an amendment to our
Articles of Incorporation combining any number of shares of our
common stock between 1.1 and 2.0 into one share of common stock.
</TABLE>
21
<PAGE>
Item 5. Other Information
None
<TABLE>
<CAPTION>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<S> <C>
3.1+ Articles of Amendment to the Amended and Restated Articles of Incorporation of Convergent
Communications, Inc.
3.2+++ Third Articles of Amendment to Amended and Restated Articles of Incorporation of Convergent
Communications, Inc.
4 + Warrant Agreement, dated as of June 3, 1999
10.1+ Second Amendment to Employment Agreement by and between Convergent Communications, Inc. and Philip
G. Allen, dated April 8, 1999
10.2+ Second Amendment to Employment Agreement by and between Convergent Communications, Inc. and Martin
E. Freidel, dated April 8, 1999
10.3+ Second Amendment to Employment Agreement by and between Convergent Communications, Inc. and Evans,
dated April 8, 1999
10.4+ Third Amendment to Employment Agreement by and between Convergent Communications, Inc. and John J.
Phibbs, dated April 8, 1999
10.5+ Second Amendment to Employment Agreement by and between Convergent Communications, Inc. and Keith
V. Burge, dated April 8, 1999
10.6++ Credit and Guaranty Agreement among Convergent Communications, Inc., Convergent Communications
Services, Inc., Convergent Capital Corporation, various lenders, and Goldman Sachs Credit Partners
L.P., dated as of June 3, 1999
10.7++ Pledge and Security Agreement among Convergent Communications, Inc., Convergent Communications
Services, Inc., Cponvergent Capital Corporation and Goldman Sachs Credit Partners L.P., dated as of
June 3, 1999
10.8++++ Purchase and License Agreement by and Between Cisco Systems, Inc. and Convergent Communications
Services, Inc. dated July 16, 1999
10.9++++ Credit Agreement dated as of July 16, 1999 between Convergent Communications Services, Inc. and
Cisco Systems Capital Corporation
10.10++++ Guaranty dated as of July 16, 1999 by Convergent Communications, Inc. in favor of Cisco Systems
Capital Corporation
10.11 Amendment No. 1 to Guaranty dated as of July 19, 1999 by Convergent Communications, Inc. in favor of Cisco Systems
Capital Corporation
27 Financial Data Schedule
(b) Reports on Form 8-K
None
- ------------
+ Previously filed and incorporated by reference to the Registration Statement on Form S-1 (Reg. No.
333-78483) filed on May 14, 1999
++ Previously filed and incorporated by reference to Amendment No. 1 to Registration Statement on Form
S-1 (Reg. No. 333-78483) filed on June 28, 1999
+++ Previously filed and incorporated by reference to Amendment No. 2 to Registration Statement on Form
S-1 (Reg. No. 333-78483) filed on July 15, 1999
++++ Previously filed and incorporated by reference to Amendment No. 4 to Registration Statement on Form
S-1 (Reg. No. 333-78483) filed on July 19, 1999
</TABLE>
22
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Convergent Communications, Inc.
Date: August 10, 1999
By: /s/ John R. Evans
-------------------------------------
John R. Evans
Chairman and Chief Executive Officer
Date: August 10, 1999
By: /s/ Keith V. Burge
-------------------------------------
Keith V. Burge
President and Chief Operating Officer
Date: August 10, 1999
By: /s/ John J. Phibbs Jr.
-------------------------------------
John J. Phibbs Jr.
Chief Financial Officer and Treasurer
23
<PAGE>
Exhibit 10.11
FIRST AMENDMENT TO GUARANTY
THIS FIRST AMENDMENT TO GUARANTY (this "Amendment"), dated as of July
19, 1999, is made between Convergent Communications, Inc., a Colorado
corporation ("Guarantor") and Cisco Systems Capital Corporation , a Nevada
corporation ("Lender").
Convergent Communications, Inc. (the "Borrower") and Lender are
parties to that certain Agreement dated as of July 16, 1999 (as amended,
modified, renewed or extended from time to time, the "Credit Agreement") and in
connection thereto Guarantor agreed to guarantee the indebtedness and other
obligations of the Borrower to Lender under or in connection with that certain
Guaranty dated July 16, 1999 made by Guarantor in favor of Lender (as amended,
modified, renewed or extended from time to time, the "Guaranty"). Guarantor has
requested that Lender agree to certain amendments to the Guaranty. Lender has
agreed to such request, subject to the terms and conditions hereof.
Accordingly, the parties hereto agree as follows:
SECTION 1 Definitions; Interpretation.
---------------------------
(a) Terms Defined in the Guaranty. All capitalized terms used in this
-----------------------------
Amendment (including in the recitals hereof) and not otherwise defined
herein shall have the meanings assigned to them in the Guaranty.
SECTION 2 Amendments to the Guaranty.
--------------------------
(a) Amendments. The Guaranty shall be amended as follows, effective
----------
as of the date of satisfaction of the conditions set forth in Section 3
hereof (the "Effective Date"):
(i) Section 9(j) of the Guaranty is hereby amended and restated
in its entirety as follows:
(j) On a consolidated basis, Guarantor and its Subsidiaries shall
maintain EBITDA for each quarterly period set forth below of not less than the
correlative amount indicated (bracketed amounts (<>) are negative):
<TABLE>
<CAPTION>
Quarterly Period Ending Required Amount
------------------------------------------------
<S> <C>
September 30, 1999 <$11,000,000>
------------------------------------------------
December 31, 1999 <$9,000,000>
------------------------------------------------
March 31, 2000 <$6,300,000>
------------------------------------------------
June 30, 2000 <$3,200,000>
------------------------------------------------
September 30, 2000 <$1,100,000>
------------------------------------------------
December 31, 2000 $4,100,000
------------------------------------------------
March 31, 2001 <$6,300,000>
------------------------------------------------
June 30, 2001 $12,250,000
------------------------------------------------
September 30, 2001 $13,250,000
------------------------------------------------
December 31, 2001 $16,250,000
------------------------------------------------
March 31, 2002 $21,000,000
------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------
Quarterly Period Ending Required Amount
-------------------------------------------------
<S> <C>
June 30, 2002 $ 25,750,000
-------------------------------------------------
September 30, 2002 $ 28,000,000
-------------------------------------------------
December 31, 2002 $ 33,000,000
-------------------------------------------------
March 31, 2003 $ 38,000,000
-------------------------------------------------
June 20, 2003 $ 44,250,000
-------------------------------------------------
September 30, 2003 $ 48,000,000
-------------------------------------------------
December 31, 2003 $ 54,000,000
-------------------------------------------------
March 31, 2004 $ 61,000,000
-------------------------------------------------
June 30, 2004 $ 71,250,000
-------------------------------------------------
September 30, 2004 $ 78,000,000
-------------------------------------------------
December 31, 2004 $ 87,000,000
-------------------------------------------------
March 31, 2005 $ 95,000,000
-------------------------------------------------
June 30, 2005 $103,250,000
-------------------------------------------------
September 30, 2005 $112,000,000
-------------------------------------------------
December 31, 2005 $120,500,000
-------------------------------------------------
</TABLE>
"EBITDA" shall mean with respect to any fiscal period of a Person,
such Person's earnings (excluding extraordinary items (determined in accordance
with GAAP)), plus (except to the extent attributable to extraordinary items
----
(determined in accordance with GAAP)) the amount of any interest, taxes,
depreciation, amortization deducted in arriving at such earnings, and, without
duplication, plus losses and less gains upon dispositions of properties added or
----
deducted in arriving at such earnings.
(b) References Within Guaranty. Each reference in the Guaranty to "this
Guaranty" and the words "hereof," "herein," "hereunder," or words of like
import, shall mean and be a reference to the Guaranty as amended by this
Amendment.
SECTION 3 Conditions of Effectiveness. The effectiveness of Section 2 of
---------------------------
this Amendment shall become effective as of the date on which the Lender has
received from the Guarantor an executed counterpart of this Amendment and the
consent of the Borrower in substantially the form of Exhibit A (the "Borrower
Consent"), to the amendments contemplated by this Amendment.
SECTION 4 Representations and Warranties. To induce Lender to enter
------------------------------
into this Amendment, Guarantor hereby confirms and restates, as of the date
hereof, the representations and warranties made by it in Section 8 of the
Guaranty and in the other Loan Documents. For the purposes of this Section 4,
(i) each reference in Section 8 of the Guaranty to "this Guaranty," and the
words "hereof," "herein," "hereunder," or words of like import in such Section,
shall mean and be a reference to the Guaranty as amended by this Amendment and
(ii) clause (i) shall take into account any amendments to any disclosures made
in writing by Guarantor and any Guarantor to Lender after the Closing Date and
approved by Lender.
<PAGE>
SECTION 5 Miscellaneous.
-------------
(a) Guaranty Otherwise Not Affected. Except as expressly amended
-------------------------------
pursuant hereto, the Guaranty shall remain unchanged and in full force and
effect and is hereby ratified and confirmed in all respects. Lender's execution
and delivery of, or acceptance of, this Amendment and any other documents and
instruments in connection herewith (collectively, the "Amendment Documents")
shall not be deemed to create a course of dealing or otherwise create any
express or implied duty by it to provide any other or further amendments,
consents or waivers in the future.
(b) No Reliance. Guarantor hereby acknowledges and confirms to Lender
-----------
that Guarantor is executing this Amendment and the other Amendment Documents on
the basis of its own investigation and for its own reasons without reliance upon
any agreement, representation, understanding or communication by or on behalf of
any other Person.
(c) Costs and Expenses. Guarantor agrees to pay to Lender on demand the
------------------
reasonable out-of-pocket costs and expenses of Lender, and the reasonable fees
and disbursements of counsel to Lender, in connection with the negotiation,
preparation, execution and delivery of this Amendment and any other documents to
be delivered in connection herewith.
(d) Binding Effect. This Amendment shall be binding upon, inure to the
--------------
benefit of and be enforceable by Guarantor, Lender and their respective
successors and assigns.
(e) Governing Law. This Agreement shall be governed by, and construed in
-------------
accordance with, the law of the State of New York.
(f) Complete Agreement; Amendments. This Amendment, together with the
------------------------------
other Amendment Documents and the other Loan Documents, contains the entire and
exclusive agreement of the parties hereto and thereto with reference to the
matters discussed herein and therein. This Amendment supersedes all prior
commitments, drafts, communications, discussions and understandings, oral or
written, with respect thereto. This Amendment may not be modified, amended or
otherwise altered except in accordance with the terms of Section 13 of the
Guaranty and Section 7.1 of the Credit Agreement.
(g) Severability. Whenever possible, each provision of this Amendment
------------
shall be interpreted in such manner as to be effective and valid under all
applicable laws and regulations. If, however, any provision of this Amendment
shall be prohibited by or invalid under any such law or regulation in any
jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform
to the minimum requirements of such law or regulation, or, if for any reason it
is not deemed so modified, it shall be ineffective and invalid only to the
extent of such prohibition or invalidity without affecting the remaining
provisions of this Amendment, or the validity or effectiveness of such provision
in any other jurisdiction.
(h) Counterparts. This Amendment may be executed in any number of
------------
counterparts and by different parties hereto in separate counterparts, each of
which when so executed shall be deemed to be an original and all of which taken
together shall constitute but one and the same agreement.
<PAGE>
(i) Interpretation. This Amendment and the other Amendment Documents are
--------------
the result of negotiations between and have been reviewed by counsel to Lender,
Guarantor and other parties, and are the product of all parties hereto.
Accordingly, this Amendment and the other Amendment Documents shall not be
construed against Lender merely because of Lender's involvement in the
preparation thereof.
(j) Loan Documents. This Amendment and the other Amendment Documents
--------------
shall constitute Loan Documents.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment, as of the date first above written.
Convergent Communications, Inc.
By ______________________________
Title:
Cisco Systems Capital Corporation
By ______________________________
Title:
<PAGE>
EXHIBIT A
---------
BORROWER CONSENT
July 19, 1999
Cisco Systems Capital Corporation
Worldwide Financial Services
Mailstop SJC2-3rd Floor
170 West Tasman Drive
San Jose, CA 95134-1706
Re: Convergent Communications, Inc.
-------------------------------
Gentlemen:
Reference is made to that certain Agreement dated as of July 16, 1999
(as amended, modified, renewed or extended from time to time, the "Credit
Agreement") by and between Convergent Communications Services, Inc. (the
"Borrower") and Cisco Systems Capital Corporation (the "Lender") and in
connection therewith, that certain Guaranty dated July 16, 1999 made by
Convergent Communications, Inc. (the "Guarantor") in favor of Lender (as
amended, modified, renewed or extended from time to time, the "Guaranty") .
The undersigned acknowledges receipt of a copy of the First Amendment
to Guaranty dated July 19, 1999 (the "Amendment") being entered into
concurrently herewith by and between Convergent Communications, Inc. and the
Lender.
The undersigned, in its capacity as Borrower in the Credit Agreement,
hereby acknowledges that its consent to the foregoing Amendment is not required,
but the undersigned nevertheless does hereby consent to the foregoing Amendment
and to the documents and agreements referred to therein and to all future
modifications and amendments thereto and any termination thereof, and to any and
all other present and future documents and agreements between or among the
foregoing parties. Nothing herein shall in any way limit any of the terms or
provisions of any of the Loan Documents, all of which are hereby ratified and
affirmed in all respects.
Sincerely yours,
Convergent Communications Services, Inc.
By: ____________________________________
Title: _________________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS 3-MOS 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998 DEC-31-1999 DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 APR-01-1998 APR-01-1999 JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1998 JUN-30-1999 JUN-30-1998 JUN-30-1999
<CASH> 25,597,461 0 11,242,052 0 0
<SECURITIES> 0 0 7,957,400 0 0
<RECEIVABLES> 19,570,031 0 24,377,914 0 0
<ALLOWANCES> (1,908,811) 0 (1,581,197) 0 0
<INVENTORY> 6,826,732 0 11,337,352 0 0
<CURRENT-ASSETS> 73,019,623 0 4,471,935 0 0
<PP&E> 28,139,460 0 44,784,898 0 0
<DEPRECIATION> (4,882,832) 0 (8,906,829) 0 0
<TOTAL-ASSETS> 185,655,629 0 200,595,437 0 0
<CURRENT-LIABILITIES> 44,519,887 0 61,376,560 0 0
<BONDS> 168,267,797 0 189,097,280 0 0
0 0 0 0 0
0 0 19,206,378 0 0
<COMMON> 27,486,554 0 36,438,015 0 0
<OTHER-SE> (48,835,439) 0 (93,625,034) 0 0
<TOTAL-LIABILITY-AND-EQUITY> 0 0 0 0 0
<SALES> 0 5,559,292 19,892,783 10,275,084 35,063,073
<TOTAL-REVENUES> 0 7,981,838 36,624,340 14,504,703 67,105,206
<CGS> 0 4,396,718 14,769,465 8,279,174 26,361,176
<TOTAL-COSTS> 0 4,798,024 22,652,397 10,569,675 42,725,966
<OTHER-EXPENSES> 0 8,901,277 31,518,396 15,725,561 57,718,869
<LOSS-PROVISION> 0 144,180 (148,004) 144,180 754,464
<INTEREST-EXPENSE> 0 5,830,022 6,149,357 5,882,591 12,086,022
<INCOME-PRETAX> 0 (11,168,720) (23,327,991) (16,279,387) (44,015,240)
<INCOME-TAX> 0 0 0 0 0
<INCOME-CONTINUING> 0 (11,168,720) (23,327,991) (16,279,387) (44,015,240)
<DISCONTINUED> 0 0 0 0 0
<EXTRAORDINARY> 0 0 0 0 0
<CHANGES> 0 0 0 0 0
<NET-INCOME> 0 (11,168,720) (23,327,991) (16,279,387) (44,015,240)
<EPS-BASIC> 0 (0.82) (1.64) (1.20) (3.12)
<EPS-DILUTED> 0 0.82 (1.64) (1.20) (3.12)
</TABLE>
